The FRC has published updated guidance on 'comply or explain' reporting to help investors, proxy advisors, and other users of corporate reporting recognise the value of flexible governance reporting, and better understand companies that choose to depart from provisions of the UK Corporate Governance Code.
“The UK Corporate Governance Code is a global standard precisely because it offers companies the flexibility to govern in a way that suits their circumstances. A well-reasoned explanation for departing from a provision is not a red flag — it is evidence of a board thinking seriously about what good governance means for their company. We want to support companies and investors alike to embrace that spirit with confidence.”
Richard Moriarty, FRC CEO.
As annual reports begin to arrive from companies with December year-ends, and as the first reporting season under the updated Code gets underway, the FRC is supporting the investment community in recognising that a thoughtful, well-reasoned explanation for departing from a Code provision is not a governance failure. It is frequently evidence of a more considered and sophisticated approach to governance than simple box-ticking.
The guidance is intended to help investors and advisors understand what to look for when reading a departure explanation, and why a departure accompanied by a clear and transparent explanation should be seen as a positive indicator of a board engaging seriously with its governance responsibilities.
The FRC's guidance acknowledges that a culture has developed across the community that considers departures from the Code suspiciously. The result is that companies declare full compliance even where an alternative approach would better serve their shareholders and stakeholders – producing boilerplate reporting that reveals little about how a company is actually governed.
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Read about the updated guidance here.